Abstract
The euro cash changeover that took place in 2002 in 12 countries of the European Economic and Monetary Union was associated with abnormal price increases in most member countries. This paper investigates the influence of product market competition on the size of the changeover-related prices hikes, showing that the price hikes were less prevalent in countries with a higher level of competition. For the countries that are to join the euro area in coming years, this means that fostering competition can help contain changeover-related price increases. This aspect is of particular importance for the most recent and next wave of euro adopters, because of their rather heavy product market regulation as measured by the OECD, which are likely to restrain competition. The results indicate that comprehensive reform efforts can be more beneficial in containing changeover-related price hikes than a selective easing of product market regulation in a subset of areas.
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Notes
Although Aalto-Setälä and Raijas (2003) find evidence that consumers remembered prices in the old currencies when evaluating euro prices Cannon and Cipriani (2006) show that European consumers had difficulties in assessing the value of euro, which means that the assessment of new prices may have been distorted.
The output gap is defined as GAP t = (GDPt/GDPt* − 1)*100, where GDP is actual GDP in year t and GDP* is potential GDP in year t.
The choice of the control variables is motivated by Ehrmann (2006) who provides empirical evidence that the size of the changeover effect was affected by these factors. The economic intuition is the following: More complex conversion rates are supposed to be associated with higher information processing costs on the side of consumers, thus elevating the problem of rational inattention. Mandatory dual pricing has the opposite effect as consumers can simply rely on the prices in the old national currency for their purchasing decision.
The classification of conversion rates follows Ehrmann (2006) with the conversion rates of Germany, Italy and Portugal classified as simple, those of Belgium, Luxembourg and Greece classified as medium complex, and the conversion rates of the remaining countries classified as complex.
See Conway et al. (2005) for details about the indicators. All data are taken from the OECD’s PMR database. The final variable is the average of the values for 2001 and 2002, where these are obtained by linear interpolation. Mark-ups in non-manufacturing sectors are calculated based on data taken from the OECD STAN database. Using alternatively mark-ups in manufacturing sectors yields very similar results.
When estimating Eq. 2 for all sectors, sectoral dummies are included in the specification. This is not possible for the sub-sample regressions since there are sectors with only a single observation.
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Acknowledgments
I would like to thank Andreas Wörgötter, Felix Hüfner and two anonymous referees for valuable comments and suggestions.
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This paper builds on work which was prepared for an informal EDRC Seminar on 9 July 2008 and published as Working Paper No. 632 of the OECD Economics Department. All views expressed in this paper are those of the author and do not necessarily represent the views of the OECD or its member countries.
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Koske, I. Price effects of the euro cash changeover: the role of product market competition. Empirica 38, 223–230 (2011). https://doi.org/10.1007/s10663-010-9133-4
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DOI: https://doi.org/10.1007/s10663-010-9133-4